§ Mr. Cynog Dafis (Ceredigion and Pembroke, North)I am very glad to have this opportunity to draw attention to the pressing need for action to help the many small businesses currently being driven to the brink of bankruptcy and beyond by the business rate system.
Launching its campaign against the uniform business rate in October last year, the Federation of Small Businesses described this tax as a "killer rating system", and it is right: the UBR is killing many small businesses—shops, garages and other smaller enterprises—which, given a fair chance, could grow into the viable and valuable firms that Wales and other places need.
Business failure in the small firms sector remains a significant problem. The federation estimated that, in the first six months of 1995, no fewer than 194,000 small businesses in the United Kingdom closed their doors, and many of them were helped on their way by the UBR. Although there has been a decrease in the number of business failures in the United Kingdom, I am afraid that the trend in Wales has gone the other way, with Touche Ross recording a 20 per cent. increase in the number of receiverships in Wales between 1994 and 1995.
Those facts are the background to this call for urgent action right now to relieve businesses in Wales and elsewhere from the crushing burden of an unfair and damaging system. The evidence of the damage done by the system is all too clear in all parts of Wales—north and south, rural and industrial—and in the other nations of the British Isles. The casualty rate among vital economic enterprises is especially severe in rural Wales, which already suffers from higher rates of unemployment, lower than average wages and outward migration. Moreover, rural Wales is now also threatened by an immense potential economic crisis as a result of the BSE situation.
A few examples may help to translate general principles into concrete instances. A business in Ynys Môn has found its trade greatly reduced because of changed traffic flows through the port of Holyhead; yet that reduction in trade has not resulted in an adjustment in its business rate bill, which stands at £6,768. The result has been the loss of four jobs in an area which is an unemployment black spot.
The first objection to the business rate is that it is a job killer. It kills small businesses and reduces employment in the few that survive. So why did the Government introduce it? I wonder whether the House recalls who it was who said on 11 March:
Small businesses are not some minority interest—they are the backbone of our economy and the main source of future jobs".It was the Prime Minister, of course, and he went on to promise the removal of unnecessary shackles from business. Words are one thing, however, and removing unnecessary shackles is another—but replacing the UBR really would really make a difference.Our second objection to the UBR is that it is unfair. It hits the high street shops of our towns while favouring out-of-town hypermarkets, which are becoming more and more evident and influential in the economy of rural Wales. The UBR has increased the difficulties of smaller shops and added to the pressure for increased use of private cars. There is therefore also 362 an environmental dimension, and there is considerable concern as a result of reports yesterday that the Secretary of State is unwilling to try to control the growth of out-of-town or edge-of-town supermarkets in Wales.
I will give an example of the effect of the UBR in the market town of Cardigan in my own constituency. A warehouse there found its rateable value increased from £1,400 to £1,800 in the recent revaluation. Another business, a local carpet shop, found its rateable value increased from £6,480 to £8,200, causing its UBR bill to rise from £2,640 to £3,321—an increase, before transitional relief, of more than 25 per cent., which is vastly in excess of inflation. That business already had difficulty meeting its bills, but it now has arrears of £6,000 to add to this year's bill. Unfortunately, that example is typical of a situation which is becoming cumulatively more difficult.
A business management consultant acting for that business appealed on its behalf to the valuation office in Carmarthen for a reduction in rateable value, but to no avail. The consultant—Mr. Gonzalez of Pwllhai, Cardigan—made eight such appeals two years ago, but none was allowed. As a result, five of the eight enterprises closed. He has made 14 appeals this year; one wonders how many of those businesses will still be open 12 months from today.
The alleged basis of the business rate, according to schedule 6 of the Local Government Finance Act 1988, is that it should
be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year".But how can the current rate be justified when it is now many times the rent which could be obtained? Currently, the rent of a small office in Cardigan could be as little as £5 per week.In Denbigh, Clwyd, 22 local traders attended a meeting in July, organised by Councillor Gwyneth Kensler, to discuss the rate increases. One of the traders, who runs a shoe shop, was quoted in the Denbigh Vale Advertiser as saying:
These rates are crippling. Based on their assessment I'm meant to be able to attract a rent of around £300 a week on my property—the truth is I'd be struggling to make £100.Traditional shopping centres are also suffering, and not only in the rural west and in the valleys. In the village of Dinas Powys, for example, just five miles from the centre of Cardiff, local shopkeepers have recently written to the Vale of Glamorgan council calling for a reduction in this year's bills. The signatories include a hairdresser, a travel agent, a pet shop owner, a greengrocer, a newsagent, and the operators of a grocer's store, a souvenir shop, a linen shop and a post office; such are the many types of business under pressure.
It is clear that the 1995 revaluation has made the situation much worse. The average increase in rateable values in Wales was 25 per cent., with particularly large increases for offices and warehouses. But the rateable values bear no relationship to today's real economic circumstances, where falling rents are not a statistical theory but a market nightmare and a reality. Although the multiplier used to work out the actual bills from the 363 rateable value was reduced for last year's bills, and will stand at 40.5p in the pound for Wales next year, the net result has been to drive bills upwards.
§ Mr. Elfyn Llwyd (Meirionnydd Nant Conwy)My hon. Friend may know that I made representations last year to the Development Board for Rural Wales, asking it to lower commercial rents in mid-Wales. It agreed because the market reflected such a move, which is exactly what my hon. Friend is saying. I agree with him entirely.
§ Mr. DafisThat demonstrates the reality of the commercial circumstances in rural Wales.
The net result of the multiplier has been to drive bills upwards to such an extent that the Government have been obliged to introduce transitional relief for the second time since 1990. The fact that transitional relief is necessary is an admission that the whole system is defective—and ultimately transitional relief means just that, because traders face the prospect of their rate bills being driven up to the target level in the next five years.
What justification is there for increasing bills by as much as 10 per cent. when the inflation rate is 2.5 per cent.? Last year, overall receipts from the business rate went up from £478 million in 1994–95 to £516 million in 1995–96—an increase of 7.8 per cent., which is more than twice the rate of inflation.
On 4 March, members of Pwllheli town council resolved to write to my hon. Friend the Member for Caernarfon (Mr. Wigley) to express their great concern at the number of empty shops in the town. It is worth reading some of the letter, written by the council clerk, Mrs. Mair Williams, and translated into English. She said that business rates are much too high and that
the rates of small shops in the High Street are higher than those of large shops and those on the outskirts of the Town. We fear that reorganisation will lead to a still greater increase in the rate. We understand that it is Government policy not to build more out of town hypermarkets but they are still going up.The Council asks is it possible to get rid of the business rate which is as unfair as the 'Poll Tax' some years ago, in order to see High Streets of our Towns prospering once more.I remember that, at the time of the poll tax campaign, many people felt that too much attention was diverted from the problems caused by the UBR, which was introduced at the same time.
The smaller shops have the strongest complaint, because the present system is loaded against them. High street shops are valued according to a zoning method which assumes that the front part of the shop, which includes the entrance and shop window, is the most valuable. Small shopkeepers find that method unfair as their rates are proportionately higher than larger shops, including hypermarkets, which have a smaller proportion of their total retail space in those higher-value zones because most of their space is behind the frontage.
Our third objection to the UBR is that it is a flat rate burden placed on business properties, without any sensitivity to the ability of the business to pay. That has always caused a problem, but it acts in a particularly negative way in two specific cases.
364 The first set of circumstances is where a business may go through a bad patch, sometimes for reasons outside its control—for instance, a major road scheme may prevent passing trade from calling at the premises. I recognise that in those circumstances there are powers under existing legislation for local authorities to give assistance towards the cost of the business rate, provided that it is not a long-term subsidy. That assistance helps the business to bridge a limited time of difficulty and is offered where the business has every prospect of being run in a viable manner thereafter.
Unfortunately, many of the old district councils in Wales are either unaware of those powers or reluctant to use them. I am glad to say that the borough of Taff Ely, during the five years when it was run by the coalition led by Plaid Cymru, used those powers and enabled at least half a dozen small businesses to survive which otherwise might not have done so. I therefore wish to press the Secretary of State for Wales and the Minister to bring to the attention of the new unitary authorities the fact that those powers exist and to encourage them to use them where appropriate. I assure the Minister that that help really is necessary. Mr. Gonzalez, to whom I referred earlier, also presented appeals to three district councils for hardship reductions under section 49 of the Local Government Finance Act 1988, but without any success.
The recent rural White Paper for Wales refers to the need for fresh guidance on that scheme and for a new rate relief scheme for general stores and post offices in villages. We welcome that relief because those shops are in a special category, but the towns are in the front line as well and a more wide-ranging review should be conducted.
Another set of circumstances reveals the need for a similar flexibility, but local authorities appear not to have the necessary powers. I refer to the position of small businesses starting up for the first time. Usually, the first year or two of any business venture proves expensive, with income building up only gradually. There is therefore considerable pressure on cash flow. If it were possible for a business taking over a property liable to pay UBR for the first time to be allowed a UBR holiday for the first 12 months or even two years, one of those disincentives would be removed. That must surely be good for everyone, not least those towns which currently have increasing numbers of empty shops and where local morale as well as local business would be boosted by new enterprises taking over those premises.
I understand that there are different opinions as to whether a local authority is empowered to operate such a scheme, and I should be grateful if the Minister would confirm whether such schemes may be set up by the new unitary authorities in Wales. If the new local government legislation is unclear on this matter, may I press the Minister to introduce the necessary amendments to that legislation to enable unitary authorities so to act? If such a power does exist already, may I press the Welsh Office to distribute a circular to the new authorities, drawing their attention to it and urging them to use it?
The Minister may reply that the unitary authorities can act on one or other—or possibly both—of the two suggestions that I have put forward, but that they have to pay for those initiatives out of their own discretionary resources so that the total UBR fund collected by the Welsh Office is not reduced. That would be unacceptable. After all, if the provision of a business rate holiday 365 scheme succeeds, shops that were previously standing empty will be filled, and the UBR fund in future years will be that much better off. At the very least, the Welsh Office should therefore agree to fund 50 per cent. of any such reduction or business rate holiday. Alternatively, it should allow the local authority to retain the entirety of the business rate paid in future years by a business which has been helped in that way.
I put forward those ideas in the context of the existing UBR and make no apology for focusing on the real needs of small businesses this year. There is an urgent need for action, but help is also needed now for businesses that are confronted with large arrears. It is the Government who have landed them with those bills in the first place and have limited the freedom of local authorities to raise money. The Government therefore have the duty to provide local councils with the necessary cash to enable them to use their discretion to write off many of those debts.
Plaid Cymru's basic position is that the UBR system should be scrapped and replaced by a system geared to local income tax. We have advocated that system consistently for many years. We propose the abolition of the council tax and the UBR. Under our system, limited liability companies would pay an incorporation tax based on company profits. Small business owners or partners would be exempt as they, along with other people, would pay a local income tax set by the local council but administered through the Inland Revenue system. Plaid Cymru also supports a property tax for second homes and the transfer to local authorities of part of the VAT take in their areas.
I emphasise the importance of the small business sector. Profits from small businesses circulate in the local economy. They often source locally and they certainly use local services such as solicitors, accountants and banks. In that way they increase the linkages within local economies which contribute so greatly to the vitality of those economies. Their behaviour is in stark contrast to that of the supermarkets and other multiples which siphon wealth out of the local economies on a huge scale.
Plaid Cymru sees the need for radical, urgent action in the short term. I hope that the Minister can offer us some comfort.
§ The Parliamentary Under-Secretary of State for Wales (Mr. Gwilym Jones)I am glad that the hon. Member for Ceredigion and Pembroke, North (Mr. Dafis) has given me the opportunity to discuss the important matter of business rates.
I should perhaps begin by recalling why six years ago we abolished locally set rates. In the 1980s, rates in England and Wales rose on average by 37 per cent. above inflation when many local authorities chose to load the costs of high spending decisions on to businesses because they knew all too well that businesses had no vote. We can see that happening again as Wales is being caned by increases in council tax of up to 25 per cent. The difference between the much lower increases of last year and those of this year is that this year there are no elections in Wales to hold those councils accountable.
By 1990, under the old business rates, the poundage in Wales ranged from 241p to 334p. Businesses were unable to operate on an equal basis—a position exacerbated by the fact that values were outdated, going back to 1973. 366 Unpredictable annual increases in rates made it impossible for businesses to plan ahead. The business community was vociferous in its complaints about the local rating system and pressed for change to national arrangements.
The uniform poundage for Wales means that businesses throughout the Principality are now treated on an equal basis. Five-yearly revaluations provide that rateable values are reviewed and updated regularly. Year on year, between revaluations, the poundage cannot rise ahead of inflation. In a revaluation year, the poundage is set to raise the same amount in real terms as in the last year of the old list. Those arrangements give the business community certainty and it does not want to return to the old rates system.
The starting point for rating is any actual rent paid on the property itself. For the 1995 revaluation, occupiers were asked for details of the rents they were paying. The evidence was used to assess the open market rent, which takes account of any incentives given to occupiers such as a lump sum payment or a period when no rent is payable, and any other special considerations. It is therefore possible that a business's rates could be higher than its rents in special circumstances. Nonetheless, it is important that values are assessed fairly. Before setting the rateable value, the valuation officer examines the rental evidence for similar properties in the area and ensures that rateable values are consistent. Data collected by the Valuation Office Agency show that, in the hon. Gentleman's constituency, shop rents rose between 1988—the valuation date for the 1990 non-domestic rating list-and 1993. contributing to a rise of some 25 per cent. in rateable values for shops in Ceredigion.
The hon. Gentleman mentioned the differences between town centres and out-of-town areas. I assure him that the system of assessment is carried out on the same rentals basis for both types of area. The hon. Gentleman strayed into planning issues, and I have to remind him that planning is a matter for the local planning authority. We have set out clearly in our new guidance the sequential approach—when considering shopping developments, local planning authorities should look first at town centres, only then at edge-of-town centres and only then at out-of-town centres. At the same time, they should have regard to the effect that out-of-town developments have on existing developments.
I acknowledge that rates are a tax on property rather than on individual businesses. The rental value of property does not reflect the profitability of a particular business, but rates do reflect the rentals that occupiers are able to pay. The hon. Gentleman's party argues for a different basis for local taxation of businesses. As the hon. Gentleman said, his party proposes a local income tax and an additional contribution of corporation tax by limited companies. However, he would have to consider whether that would mean that local businesses were making a contribution to the cost of local councils. I believe that they should, but it would depend on the location of their head offices.
Another difficulty is that of, in effect, relating local tax to profits, which would be very burdensome. Profits vary from year to year. The tax would be complex, it would provide no certainty for businesses, and it would remove links between local authorities and the business community. Nor do I believe that such a change would find favour with the business community. The hon. Gentleman may care to reflect on the recent report by Dun 367 and Bradstreet, which states that firms in Dyfed are the most profitable in the United Kingdom—so a tax on profits could have serious consequences for his constituents.
The overall effect of the 1995 rating revaluation was a 20 per cent. increase in rateable values in Wales. Given the requirement that between revaluations the rates yield should be broadly the same in real terms, the poundage for Wales fell from 44.8p to 39p. Some 59,000 ratepayers were expected to face rateable value increases while some 21,000 were expected to have decreases. We therefore, very naturally, introduced a transitional scheme—I was surprised by the hon. Gentleman's opposition to it—along the same lines as the one applied in 1990, so as to spread the increases over the five-year life of the rating list. As a result of the transitional arrangements, no business faced an increase in its rates bill of more than 10 per cent. plus inflation.
We were especially concerned to help small businesses. For properties with a rateable value of less than £10,000, increases were limited to 7.5 per cent. in real terms. For small composite properties consisting of business and private accommodation, increases were limited to 5 per cent. in real terms. From 1996–97, the Government have made that help to small businesses even greater: small composite properties will be limited to real terms increases of 2.5 per cent., other small properties to increases of 5 per cent,. and larger properties to increases of 7.5 per cent.
The total cost of that extra help in Wales is around £8 million for each of the next three years. The arrangements particularly favour small retail businesses, including sub-post offices and village shops. For the 1995 list, the transitional arrangements continue to apply even when premises have a change of occupier. The transitional arrangements are also of particular benefit to businesses in Ceredigion, where just under two thirds were in transition to higher bills in 1995–96 as a result of the 1995 revaluation. On average, shops in Ceredigion have seen a real-terms increase in rates bills of 5 per cent. in 1995–96.
§ Mr. DafisI should make it clear to the Minister that I was in no way expressing opposition to the idea of transitional relief. I was merely saying that the fact that there is a need for such a mechanism shows that the system is seriously flawed.
§ Mr. JonesI do not accept that. It relates to rental values, and it moves as the rental values move—not independently or arbitrarily. That is why, so long as we maintain a rating system of a tax based on property, we need to have the greatest consideration for small businesses and to establish transitional arrangements at the time of changes in valuation. The five-year period means that there are greater changes, but in itself it gives 368 greater certainty to businesses because they can plan ahead rather than having to face changes perhaps every year, or as often as the hon. Gentleman's party suggests.
The hon. Gentleman asked about the opportunities for local authorities to give discretionary relief on hardship grounds. They are able to do so—there is no difficulty about that—but I know what he means about the limited use of hardship relief in Wales. More than £1 million was offset centrally from the rates pool in 1994–95 to cover all discretionary reliefs, including relief for charities and other non-profit-making bodies. Of this, however, only about £10,000 was for hardship relief, with only 15 out of 37 authorities granting such relief.
The Government, too, are concerned and are reviewing the situation, asking billing authorities about their policies and asking ratepayers for their views on how the relief provisions are being used. We will consider what action is needed in the light of that assessment, but it is likely to include identifying examples of good practice and issuing new guidance.
I believe that businesses are far better off under the system of uniform business rates than under either the old rating system or the system of local taxation that Plaid Cymru favours. Businesses have the assurance that there will be no real terms increases in their rates burden to finance extra expenditure. Indeed, in the previous five Budgets, the Government have committed a considerable amount of additional transitional relief to ratepayers, which means that, overall, in real terms ratepayers pay less in rates than they did in 1989–90.
The transitional relief arrangements and the review of the hardship arrangements show that the Government take careful account of the needs of small businesses. Our concerns for such businesses are also clear from the proposals set out in the White Paper, "A Working Countryside for Wales", in which we propose to provide additional relief for village shops and post offices. I was glad to have the hon. Gentleman's welcome for that. We shall shortly be issuing a consultation document, seeking views on the conditions which should attach to the relief in terms of the location, size, purpose and importance to the community of the shops concerned. I expect large parts of Wales to benefit.
As I have been at pains to stress, the Government take the concerns of small business about the business rate very seriously. We have listened to what small firms have said on this issue in the recent "Your Business Matters" series of conferences, one of which was held in Cardiff last November. At the national conference for small business on 11 March, the Prime Minister said that we are prepared to consider whether sensible changes could be made to make the business rating system fairer and more transparent. All the concerns of small businesses are under active consideration. I invite the hon. Gentleman to watch for developments in the coming months.
§ It being four minutes to Two o'clock, the motion for the Adjournment of the House lapsed, without Question put.
§ Sitting suspended. pursuant to Standing Order No. 10 (Wednesday sittings), till half-past Two o'clock.